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Mid-Cap ETFs: Growth And Stability At A Better Value

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Mid-cap stocks – those with market capitalization between $2 billion to $10 billion – are less known than large and small cap stocks, but they can provide profitable investments, according to investment experts.

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Quality, stability and value are typically associated with large cap stocks. Growth is usually associated with small-cap stocks. Mid-cap stocks tend to be ignored, despite the fact that such stocks have been among the best-performing equity groups since the beginning of the 21st Century, to Todd Shriber, ETF editor at Benzinga, writing in Investopedia.

Mid-cap companies are also more diversified than their small-cap peers, allowing many mid-sized companies to generate more consistent revenue and cash flow and provide more stable stock prices, according to Tom Lydon, writing in ETF Trends. Additionally, the mid-caps are not so big that their size would slow down growth.

The mid-caps segment outperformed large-caps, but with less volatility than small caps, Lydon added. The returns of mid-caps have also beaten those of small-caps during the trailing three-, five-, and 10-year periods, with less volatility.

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In addition, mid-cap stocks spare investors the burden of picking stocks while providing the advantages of dividends.

What Makes A Mid-Cap Stock?

While market capitalization is based on market price, a stock priced over $10 is not necessarily a mid-cap stock, according to Investopedia. Analysts multiply the current market price by the current number of outstanding shares to calculate market capitalization.

If company A has 10 billion outstanding shares at $1, its market capitalization is $10 billion. If company B has 1 billion outstanding shares at a $5 price, its market capitalization is $5 billion. While company A has a lower stock price, its market capitalization is higher. Company B may have a higher stock price, but it has a tenth of the outstanding shares.

What Mid-Caps Offer Investors

Most financial advisors suggest a mix of low-, mid- and large-cap stocks to have a diversified portfolio, but some investors believe mid-cap stocks diversify the risk in addition to diversifying the portfolio.

Small-cap stocks, which offer the most growth, have the most risk. Large-cap stocks, which are the most stable, offer lower growth. Mid-cap stocks offer a hybrid of small-cap and large-cap stocks, a balance of stability and growth.

What To Look For

The most important thing to consider when searching for mid-cap stocks is potential for growth, according to Wall Street Survivor. Investors should seek companies that can grow faster than their larger peers in the industry, thereby gaining market share.

The company should be a largely undiscovered stock, giving it a cheaper valuation. Mid-caps that have low leverage and higher growth profiles that the market has not realized are good choices.

Investors in mid-cap ETFs must be sure the ETF they choose is not a misrepresented large-cap fund, Shriber noted.

A Model Mid-Cap Stock

Shriber observed the dividend yield for the underlying index for WisdomTree MidCap Dividend Fund (DON) is just under 3%, which surpasses the S&P 500 or 10-year Treasuries corresponding yields.

DON also compares favorably against S&P MidCap 400 Index, Shriber noted, which yields just below 1.3%. In addition, the weighted average market value of its holdings is around $5.2 billion, $16 billion under DON member firms’ weighted average market value.

DON delivers risk-adjusted returns, which is what matters, Shriber noted. Over the past three years, DON is 43.7% higher, versus the S&P MidCAP 400’s 35% gain. In addition, DON has been roughly 10% less volatile compared to the S&P MidCap 400.

Since March 2009, when the current bull market began, DON rose more than five-fold, surpassing the S&P MidCap 400.

Weighting Matters

Up 3.4% in 2017 and posting record highs, DON distinguishes itself in that more than 400 of its holdings are weighted to reflect the proportionate share of aggregate cash dividends that each component company is expected to deliver in the coming year. This projection is based on the most recently declared dividend per share.

DON’s weighted average market value holdings at the end of the first quarter were $7.1 billion, which is less than half of the Vanguard Mid-Cap Growth ETF’s weighted average market value. DON’s weighted average market value was roughly $1.8 billion over the S&P MidCap 400 Index.

DON’s 400 holdings are weighted by dividends, compared to mid-caps weighted by market value. Weighting by market value provides a large-cap fund in disguise as prices increase, Shriber noted.

The WisdomTree MidCap Dividend Index, DON’s underlying index, in the past six years has beaten the CRSP index by more than 35%.

WisdomTree noted that the 35% indicates the selection of the mid-cap is critical, rather than which mid-cap indexes will perform best over the next six years, which is not known at the present time.

While many indexes are named “mid-cap,” there is a significant difference in performance.
21.3% of the DON fund’s weight is allocated to consumer discretionary names. The CRSP index, by contrast, allocates less than 24% of its weight to consumer sectors.

DON allocates 29.1% to industrial and real estate names to improve its dividend yield to 3%, which is above average for mid-cap ETFs.

With $2.8 billion in net assets, DON generates income in a low-interest rate environment within mid-cap stocks, making it a category creator, according to Shriber. Dividends previously were considered a large-cap equity phenomenon.

A Compelling Multi-Factor Idea

Among mid-cap ETFs, Lydon of ETF Trends noted the John Hancock Multifactor Mid Cap ETF has a compelling multi-factor idea.

Hancock ETFs indexes use market-capitalization adjustments to increase the weights of smaller companies within the eligible universe and lessen the weights of larger names. The methodology indicates that the ETFs have a more equal-weight tilt with more exposure to smaller companies than traditional market-cap weighted index funds.

The Hancock ETF allocates 34% of its combined weight to industrial and technology stocks while the consumer and financial services discretionary sectors combine for 29% of the ETF’s weight. None of the 678 holdings command weights of more than 0.55%.

Hancock was among a small number of ETFs to hit record highs last week, bringing its year-to-date gain to just over 7%. The ETF debuted in September 2015 and now has more than $170 million in assets.

Investors currently have an opportunity to take advantage of the mid-cap ETFs before the benefits become more widely known.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Business

Why You Must Buy The Brand Names

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No matter if you are a developer with deep knowledge of technology or a prospective first time investor, your choices are pretty mind-boggling. This year started with 1384 cryptocurrencies. More are coming every week.

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Literally billions are being made but how to choose the right one. If it means spending you life buried in complex technical blogs trying to understand both the obtuse technical language and then the writers jargon, you may decide to bail.

Putting Perspective on The Technology

There are loads of folks who understand the different technology between bitcoin and Litecoin or between Ethereum and Cardano. My perspective comes from analyzing dozens of businesses over more than four decades and cryptocurrencies is one of the most promising yet.

Simple Solution

Here is a solution that will help you cut through the complexity. Buy the best brand name. Classic investment risk management dictates a completely different strategy. Every certified investment advisor will recommend risk diversification and clearly cryptocurrencies are about as risky as you can find.

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However, after digging through all 1384 cryptocurrencies, you will be fully diversified by owning just two brands. The couple that we are talking about is bitcoin and Ethereum.

There are other choices in the top ten like Ripple, bitcoin Cash, Cardano and Litecoin. Each brand is worth researching but none offer all the combined benefits of bitcoin and the Ethereum Network.

ICOs Don’t Need To Be Confusing: Look To Ethereum

 In the past year some huge returns have been chalked up by initial coin offerings. Here we are talking about companies seeing their value go from fractions of a penny to dollar multiples in no time. The challenge is how to choose the right one.

Consider what you are dealing with. Initial coin offerings allow companies that are at pre-venture capital stage to get started. So the risks here are higher than investing in a blind pool venture capital fund.

The accepted formula by VCs is to aim for a success rate of 2%-5%. This means that 95% of the companies that are much further developed than most ICOs will fail. With your chances of finding the dream ICO generously placed at 1%-2%, why bother.

In 2017 more than 1,000 ICOs raised about $4 billion. According to ICO Watch List, 78.7% of those used the Ethereum platform. So if you want to play the ICO game, why not simply own the gas the powers the network: Ether.

 The Ethereum Brand: Think Microsoft Corp

In a recent CNBC interview Ethereum co founder Steven Nerayoff made the comparison of Ethereum with the early stages of Microsoft Windows. Along with Bill Gates, Microsoft is one the world’s most ubiquitous brands. Side note: Microsoft didn’t reach Ethereum’s present value until after ten years of Windows.

Nerayoff cites billions of dollars being poured into as many as ten times the number of projects in 2018 over the previous year. From his vantage point these projects include a wide breadth of industries starting from financial tech, oil & gas, gaming, travel/resorts, government and various creative areas.

According to Jeremy Millar, cofounder of the Enterprise Ethereum Alliance (EEA), CEOs across the world are clamoring for blockchain technology. Millar believes most CEOs require a heavy dose of education about the new technology and that means there will be a natural demand for the largest supplier with the biggest brand- Ethereum.

A key to Ethereum’s brand leadership started last February when the EEA to connect Fortune 500 companies with Ethereum experts. Now with almost a year under their belt membership has grown to over 300. This is brand leadership in the most important market for Ethereum. Nobody else is close.

The Bitcoin Brand

Think of bitcoin as a brand like MasterCard, Visa, American Express or even Crest toothpaste. Each of these names enjoys instant consumer recognition thanks to million invested in advertising, marketing and image development. Bitcoin is unique in the sense that not a single bitcoin has been spent to advertise its usefulness.

One source claims there are well over 10,000 merchants that accept payment in bitcoin. Headliners include Microsoft Corp, Subway, Whole Foods, Intuit, Expedia, Bloomberg, Dish Network and Overstocked.

Ask First Data, Fiserv or any other payments processing company and they will attest to the difficulties of changing client habits in accepting payments. Any newbie attempting to enter the payments business will have to answer the dual questions: what makes you better, faster and cheaper then bitcoin and do you have greater consumer acceptance? Right now, bitcoin has a lead of at least two year and they aren’t sitting still.

The Bitcoin Moat Is Being Built

 Bitcoin is the king of digital currencies but the king is not perfect. There are those shortcomings like volatility and slow speed.

The start of a bitcoin futures market began on December 18. The CME and CBOE are giving everyone the ability to hedge. The prospect of reduced price volatility will attract additional mainstream retailers.

No more than a few days after futures trading began on the CME, one of the largest luxury used car dealers in Japan announced the acceptance of bitcoin. Since then the giant investment bank Goldman Sachs has created a research team and issued a glowing report on the cryptocurrency outlook. The tipping point for bitcoin has taken place.

The bitcoin moat is being built even wider by Bitcoin Lightning Network, which was released this week both increasing speed and resulting in dramatically lower fees.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Bitcoin

Hot Crypto Topics For 2018

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It is pretty hard to understate what 2017 has meant for investors. The S&P 500 had one of it best years in more than five appreciating 20% to a record near 2700. The global economy continued to recover from the last vestige of the 2008 financial crisis. Everybody has the right to feel financially more secure.

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But if you were for fortunate to be a crypto investor, you have cause to celebrate like never before. Bitcoin rewarded you with a 1660%+ price appreciation, Ethereum gained a monster 10,200%+ while Litecoin turned in a 6,500%+ price increase.

And these are just the majors. Returns with some of the successful ICOs were even more spectacular. Of course not every ICO paid off and some fell victim unscrupulous operators. Nevertheless, 2017 was a golden year.

When prices increase as much as they have it is easy to get fixated solely on price alone and forget about the underlying forces that represent true value.

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So what will be the fundamental forced in 2018? It is hard to know the future so far out because it is evolving so quickly, but here are some thoughts on several very important issues.

 The Need For Speed

 Turning away from the ton of good things that happened in 2017, there are the twin issues of slow speed and high transaction fees. It is a thorny situation. Each of us can appreciate the need to any system to be successful has to be capable of scaling. Appreciating the higher energy consumed can be a bit more obtuse but it a big deal.

The promise of cryptocurrencies like bitcoin going back to the beginning was “fast and free” As the table below illustrates, transaction speeds are stalling and falling short of the promise.

The high transaction costs for all cryptocurrencies is presently a major deterrent to broader acceptance. Depending on how you work the math, performing a transfer in bitcoin can be more the using a fiat currency and using the traditional banking system.

Presumably the solution to faster transaction speeds would be less energy consumed which in turn would allow competition to drive down fees.

At present even 10-15 transactions per second is not nearly enough to meet projected demand in the future. Finding a solution is important to everyone from the major currencies like bitcoin, Ethereum and Litecoin down to companies linked to each.

Some help for Ethereum may be on the way in 2018 when Casper is fully in action.

Casper changes the Ethereum verification process from “Proof of Work” to “Proof of Stake”. One of the issues Casper addresses is high-energy consumption.

Part of the issue spills over into security. In order to maintain adequate security of Ethereum POW protocol involves very high operating costs. Casper dramatically lowers these costs.

Experts who have deep knowledge of Casper claim that honest miners will be able to cheaply validate while attackers somehow will still face extremely high costs.

Casper addresses this problem. In doing so, Casper puts Ethereum in a much stronger position to serve the world. The more users, the more demand for Ether and that, of course means even more upward Ether price pressure.

And then there is the Ethereum Raiden Network. This is Ethereum’s version of bitcoins Lightning Network. The technical definition of Raiden is allowing off-chain scaling solutions for performing so called ERC20-compliant token transfers

Raiden supposedly enables near-instant, low fee, scalable transactions. The operative words here are off-chain scaling and privacy preserving. This is an option to watch closely in 2018 to see if Raiden can live up to some big promises.

Could Terabyte Blocks Be The Big Solution

 It is only a research paper but the founder of Lokad Joannes Vermorel has come up with a possible answer by creating terabyte size blocks. His idea has only focused on transactions for bitcoin cash but if it works there you can bet that adaptations for other currencies will follow.

 Joannes argues that terabyte blocks could not only be fast but economical. He explains how terabyte blocks could scale to far more than the current 1MB blocks size or about 3-4 transactions per second.

According to his research paper a terabyte block could contain around 7 million transactions per second. That relates to 50 daily transactions for virtually every human on planet earth. That promise alone is what makes Vermorel’s idea worth keeping an eye on.

How difficult it will be to translate Joannes idea into a real world application and then be adapt to cryptocurrencies beyond bitcoin cash is anybody’s guess. One thing is certain, transaction speed and costs are likely to be hot topics in the New Year.

Remember, one of the original selling points of bitcoin was that transactions were fast and free. At present neither of these two promises are being consistently met. Even so, the possibilities are so fascinating that it keeps our attention glued to events that will shape the future. Whatever 2018 brings we will share our views and hope your prosperity continues.

Featured image courtesy of Shutterstock. 

 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Education

Stop and Consider This Before Investing

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It seems like everywhere we look there is a sensational media account of bitcoin’s stratospheric price and amazing quadruple digit appreciation. About as often a new ever-higher forecast for 2018 appears.

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Massive volatility permits fear and greed exists side by side. That usually means we all need to take a deep breath and try to put emotions aside.

Fundamental help is rare these days. Headlines dominate our actions. Here are a couple of examples. The CME and CBOE’s offering of a bitcoin futures contract will help smooth price volitility. Bloomberg News reports that Goldman Sacs is close to opening it trading desk to Bitcoin.

What Are Headlines Really Worth

These are two announcements are good for investors driving Bitcoin prices ever higher. But they don’t answer the most important question: What are digital currencies worth?

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It is an educated guess, so here are some of the best educated guesses so far.

First we need a valuation method and one of the most interesting that I have come across is from crypto disciple Thomas Lee. He currently forecasts a $25,000 Bitcoin price before 2022. Here is how he gets there.

Metcalfe’s Law Makes Sense

Using something called Metcalfe’s Law he compares the value of a cryptocurrency to the value of companies like Facebook and Google.

Here is how the formula works. Take to total number of users, multiple that number by itself. Then, take that result and multiply it by the average transaction for each user.

If this all sounds way too geeky, you’re not alone. It helps if you remember the self generating explosion that took place in social networking and apply that to cryptocurrencies; applying Metcalfe’s Law makes sense.

Lee claims this method explains virtually all of the historic price movements of Facebook, Google and Bitcoin. We haven’t double-checked his work, so we are taking this explanation at face value.

Metcalfe’s On Steroids

Ok, so if we apply Metcalfe’s Law to Bitcoin and other cryptocurrencies, is it just as appropriate to compare their potential to Facebook and Google? That is an easy question to answer, of course it is.

The market for Facebook and Google services is virtually every person on planet earth. The same holds for Bitcoin. So please allow me burn some battery life on my iPhone calculator. Numbers can be really boring so keep some coffee nearby.

Comparing Facebook and Google

The combined value of Facebook and Google is just a tad over $1.25 trillion dollars. Meanwhile bitcoin is bouncing somewhere around the $300 billion level. That is a big upside for bitcoin, if it reaches some sort of level comparable to two of the biggest tech giants of the past 25 years. Here is where things get really interesting.

BusinessInsiders.com recently posted an article with some jaw dropping stats on the global supply of money. This is the addressable market for cryptocurrencies. Under their Broad Based Definition, there is a staggering $90.4 trillion of money floating around the world.

For bitcoin’s theoretical value to match the Facebook, Google combo, bitcoin would need to capture a mere 1.3% of the global loot. Achieving that level of acceptance means bitcoin’s value could reach three times present levels. Is that realistic; from our illustration it looks very achievable. If all these developments took fives years, that offers a better return than most.

Applying Metcalfe to Ether

 If you accept Metcalfe’s law as a starting point for valuing bitcoin then consider applying it to Ethereum. The mantra of successful investing is applying the discipline of comparative selection. Here is the case for Ether, the crypto that fuels the Ethereum blockchain.

The Ethereum platform is not so much a currency as it is a decentralized blockchain the holds the promise of making corporate big data safer to store. Companies that have tested applications of the Smart Contracts that is part of Ethereum have found savings in the billions. Security and savings are two words that are powerful selling tools to corporate CEO every day of the week.

There are limitless business applications to Ethereum. The open source nature of the platform help explain why nearly $4 billion will be raised in startup capital by the end of 2017 and why over 300 major corporations have joined the Enterprise Ethereum Alliance since it founding in February.

Ethereum’s potential should be viewed in terms of the $110 trillion+ World Gross Product. This is not an absurd figure considering that every part of the world is becoming digitized and decentralized blockchain technology has a role anywhere where data is stored and manipulated.

Bitcoin versus Ethereum

 It is virtually impossible to come up with a good reason that either of the two largest cryptocurrencies has greater potential over the other. The prospects for both are pretty amazing. But if that is the case then consider this.

At it’s recent $20,000 all time high bitcoin was valued around $300 billion. Ethereum on the other hand at its $687 high was worth only about $70 billion. Investment analysis is the discipline of comparative selection. This makes Ethereum the clear choice when looking at comparative values.

Over long periods, this spread in values could and should narrow. In the short term, as we witness in Decembers severe price correction, both crypto’s lost equally: about a third of their value: something to keep in mind.

The purpose of all this exercise is to draw attention to a way of looking at value. It is not the only method, but it is something that puts emotion in its place. These are our opinions only so do not consider this in the same context as advice from your regular investment advisor.

Featured image courtesy of Shutterstock.  

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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